FINANCIAL SECTOR FINALLY TURNS UP -- REGIONAL BANK AND BROKERAGE ISHARES BREAK OUT -- BANK LEADERS INCLUDE CITIGROUP, WELLS FARGO, AND US BANCORP -- GOLDMAN SACHS LEADS BROKERS HIGHER WHILE MORGAN STANLEY STRUGGLES WITH 200-DAY LINE
FINANCIAL SPDR BREAKS OUT... Financial stocks have finally turned up. Chart 1 shows last Thursday's upside breakout in the Financials Sector SPDR (XLF) and on rising volume. In fact, financials went from the market's weakest to the strongest group for the week. The jump in financial stocks no doubt contributed to the ability of the S&P 500 and other major stock indexes to clear their April highs. Financials are pulling back a bit today (on lighter volume). However, the upside breakout will remain intact as long as the XLF remains above its breakout point near 16. One of the biggest contributors to the XLF breakout was Citigroup which achieved an upside breakout of its own as shown in Chart 2. Although several other financial stocks broke as well, one that didn't is JP Morgan Chase. Chart 3 shows JPM having cleared its 200-day moving average, but still testing resistance around the 41 level. That's an important hurdle to overcome for both that stock and the group. That's because JPM is the most heavily weighted stock in the XLE. In my view, an upside breakout is likely.
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Chart 1
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Chart 2
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Chart 3
BANK REGIONAL HOLDERS EXCEEDS 200-DAY LINE... The sudden jump in bank shares had a lot to do with last week's financial breakout. Chart 4 shows Bank Regional Holders (RKH) surging through their 200-day average at week's end (accompanied by strong volume). That put the RKH above its 200-day average for the first time since May and dramatically improved its chart pattern. Two of the biggest stocks in the RKH achieved bullish upturns of their own. Charts 5 and 6 show Wells Fargo and US Bancorp breaking through resistance on impressive volume. Upside breakouts (not shown here) were also achieved by State Street, Bank of New York, and Northern Trust. Brokerage stocks also contributed to the financial improvement.
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Chart 4
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Chart 5
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Chart 6
BROKER ISHARES ALSO TURN UP ... It's hard to imagine a strong rally on Wall Street without participation by brokerage stocks. In fact, the trend of brokers has long been viewed as one of the best barometers of stock market strength. It's a good sign, therefore, to see these stocks finally starting to rise. Chart 7 shows the Dow Jones US Broker-Dealer iShares (IAi) rising to the highest levels in six months. The group's relative strength ratio (below chart 7) has started to rise as well. The gold standard in the group is Goldman Sachs which is also the biggest holding in the IAI. Chart 8 shows GS turning up during October which gave an early hint of group strength. The stock's RS line (below Chart 8) is on the verge of an upside breakout of its own. Some of today's profit-taking in the financial group is coming from a 2% drop in Morgan Stanley (the second biggest holding in the group). Chart 9 shows MS meeting resistance near its 200-day line. By contrast, Legg Mason (not shown) has reached a 52-week high. Renewed confidence in brokerage stocks is usually a good sign for the stock market.
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Chart 7
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Chart 8
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Chart 9
30-YEAR T-BOND YIELDS CLEARS 200-DAY LINE... I explained last Thursday that one of the casualties of QE2 would be the long bond. Since then, the price of the long bond has fallen as its yield has been rising (bond prices and yields trend in opposite directions). In fact, Chart 10 shows the 30-Year T-Bond Yield (TYX) clearing its 200-day average for the first time since May. Part of the reason the 30-year yield is rising is because the Fed isn't buying long bonds. Another is fear of inflation resulting from a falling dollar and rising commodities. I also suggested last week that a steeper yield curve resulting from QE2 (which happens when shorter maturities fall while longer maturities rise) is usually good for bank stocks which may explain why they've turned up. Chart 11 shows the 20-Year T-bond iShares (TLT) falling to the lowest level in five months. Another possible side-effect of a falling Treasury bond price is that it may entice some money back into stocks. The S&P 500 (top of Chart 11) usually trends in the opposite direction of the long bond.
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Chart 10
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Chart 11
DOW P&F TREND IS UP ... Last Thursday's message showed the bullish breakout in the Dow Industrials (and Transports) which took out their April high. That's a sign of market strength. Point & figure charts are especially helpful in tracking a market's trend and spotting clearcut buy and sell signals. The point & figure boxes in Chart 12 show the Dow in a clear p&f uptrend since September with an initial buy signal at 10200 (a p&f buy signal takes place when a rising X column exceeds a previous X column). A second upside breakout took place at 10750 when the Dow exceeded its August high. The third breakout took place last week at 11300 when the Dow exceeded its April high. An overbought market may give way to some short-term profit-taking. At this point, however, the Dow would have to drop all the way down to 11000 to trigger a p&f sell signal.
